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Forget Qualcomm: NXP Semiconductors Is a Great Growth Stock In Its Own Right

The acquisition bid still gets most of the attention, but the Internet of Things giant offers growth potential even if the deal is never consummated.

With its pending $38 billion buyout offer from Qualcomm(NASDAQ:QCOM) still on the table -- equal to $110 a share -- Netherlands-based NXP Semiconductors (NASDAQ:NXPI) may seem an unlikely growth stock. Thing is, Qualcomm has been forced to extend its offer on multiple occasions, including one just a few days ago.

The latest extension will expire on Oct. 20, more than a year after the offer was first announced. It's pretty clear NXP shareholders are not enamored with the asking price, a situation which creates a couple of opportunities for investors -- and both scenarios bode well for prospective investors in search of growth.

Image source: Getty Images.

Delivering the goods

Setting the Qualcomm offer aside for a moment, NXP continues to post strong results. Though last quarter's total revenue fell 7% to $2.2 billion, NXP's comparisons were skewed due to the divestiture of its standard product group earlier this year.

If you factor out the $303 million in revenue NXP's standard products unit generated a year ago, its Q2 revenues were actually a 7% year-over-year improvement. And that's hardly the only good news it had to share.

Thanks in large part to its progress on shaving both operating expenses and cost of revenue, it hit a gross profit of $1.08 billion (excluding one-time items) that was essentially flat, despite the "drop" in total revenue. And operating margin -- a key metric as it relates to how efficiently run NXP has become -- rose nearly three percentage points from 25.6% to 28.4%.

Perhaps most impressive -- especially given NXP's focus on the Internet of Things (IoT), which is the primary reason Qualcomm is so interested -- were the results from its two largest and most critical divisions: automotive and secure connected devices.

Nearly half of its total sales, $938 million to be precise, came from its automotive unit, delivering a 9% increase over last year. Revenues from its second-largest generator, secure connected devices, soared 14% to $588 million. Given the explosive growth in IoT gadgets and the unprecedented amount of data being collected in today's digitized world, NXP is ideally positioned to ride this wave for years to come -- with or without Qualcomm.

A world with, and without, Qualcomm

NXP's current stock price of approximately $112.50 a share is intriguing given Qualcomm's offer is for $110 per share. It's also noteworthy that after a full year of trying to get NXP shareholders to accept the bid, a measly 3% of outstanding shares had been tendered as of a few days ago.

That lackluster response leads to one obvious question: What happens from here? Two scenarios seem most likely to unfold. One, Qualcomm stops extending its offer period, breaks down, and finally does what shareholders obviously want: offers a significantly higher bid than the $110 a share deal on the table now.

Or, NXP thanks Qualcomm for its time and interest, and continues independently to deliver on its successful forays into smart cars and securing a growing number of IoT gadgets. Either way, investors would come out ahead -- even those who jump on board now.

Finally, there's also the not so small matter of NXP being an outstanding value relative to its peers. Its forward price-to-earnings ratio (P/E) is just 16, more than 30% below the peer average of 23.5 times projected earnings.

Yes, there are questions yet to be answered, but given how NXP is growing in all the right places -- IoT -- Qualcomm will almost certainly have to up the ante to get any deal done. And if the deal falls through, NXP stock still represents significant value, offering growth investors a world of upside.

Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.

Author

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.